Top Trends in Insurance Industry Disruption
From: Captive.com, March 29, 2017
The Captive Insurance Companies Association (CICA) 2017 International Conference March 12–14 was themed "Defying Disruption." While the event did a good job in highlighting the demographic changes impacting the captive insurance market, the role of technology in insurance industry disruption received less emphasis. Although there was one presentation on disruptive technology, the bulk of the discussion focused on cyber-insurance. So, what should captive owners know about the dramatic changes in store for the insurance industry? In this article, we will explore some of these trends and predictions and their potential impact on captives.
A critical component of being conversant on the technology trends that are changing the insurance industry is a list of sources where this information is available and being discussed. One individual who is on our reading list is Michael Ian Coles, chairman and CEO of Cedent. Mr. Coles was the keynote speaker at the 26th annual World Captive Forum in January 2017 and is also a prolific writer on the technology forces shaping the insurance industry. We will highlight some of his thoughts in the following paragraphs, and you can follow him on Twitter (@michaeliancoles).
A second major source of information is the Big Four accounting firms, which each have dedicated technology resources in the insurance space. Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers all are extremely active in the fintech and insurtech consulting space and produce numerous reports and monographs on how these new companies are threatening the status quo that has existed in insurance for a long time. Unfortunately for captive insurers, unless you are a single-parent captive for a Fortune 1000 company, it is less likely you have contact with these organizations. Therefore, it is important to register on their websites (links provided above) to receive new articles as they become available.
Finally, readers should follow technology companies both large and small. An IBM Corp. leader, discussing IBM's Insurance 2020 report in a Business Insurance article ("In the Year 2020: 'Mega-trends,'" by Rodd Zolkos, July 16, 2006), is reported as saying, "While the insurance industry doesn’t have a problem with technology, it does have a ... problem in letting go of the industry's traditional monolithic value chain." A question for captive insurers is whether we fit this description as well. As an industry, which was founded on being a nimble and responsive competitor to traditional insurers, are we settling into a contented middle age? Are we, within our own board meetings, exploring and discussing the changes impacting the primary insurers and reinsurers and how these same forces could potentially impact us?
Deloitte UK, in a 2015 white paper titled Insurance Disrupted—General Insurance in a Connected World, lists nine applications of digital technology already changing the insurance space. The selected applications are all identified on the basis of the following characteristics—criteria captives might want to emulate when discussing this topic.
- "High potential demand among customers"
- "High potential impact on the bottom line"
- Current "lack of regulatory barriers"
- "Technologically possible today"
Here is an abbreviated version of the Deloitte list as well as several others we have added based on our knowledge of what is occurring in this space.
- Price comparison technology
- Mobile Internet transactions
- Telematics-based services
- Peer-to-peer insurance
- Sharing economy insurance
- Artificial intelligence underwriting
- Artificial intelligence claims settlement
- Distribution technology
In an interview titled "Perspectives Interview with Michael Coles—Part II" published August 15, 2016, on the InsuranceLinked website, Mr. Coles discusses how the proliferation of data is impacting the insurance industry. He is quoted as saying the following.
Data is the new oil in this era. That's why you've got a lot of these large carriers investing in the Internet of Things, to add value and to show they can be of more value to the customer. The challenge right now is to take the data and create action on it if you're able to better price the risk and do it in real time. You can use data to help you tackle the risk and the expense ratio to reduce the cost and potentially reduce the premiums for the customer.
Just like the insurance carriers don't want a loss, the customers themselves don't want a loss. The data will help with the actual loss prevention. Today people don't understand how much risk they actually have. Data won't be able to tell you everything, but by using a greater number of variables, we'll be able to get a much better risk landscape and you'll be able to see what your risks are and how best to mitigate some of those. For insurance companies, data will also allow you to select the better risks or the risks that fit best within your portfolio.
So how are insurance companies trying to cope with these disruptions? Many are starting to recognize the need to establish stand-alone equity ventures or innovation labs outside of their traditional corporate structures. A quick Google search reveals a "who's who" of the primary and reinsurance insurers that have started ventures to explore new digital trends. What seems to be missing from this list is any mention of captive insurers. Certainly, there is a scale issue involved here, but the question for captive insurers should be, "How do we play in this space to make sure we aren't left behind?" Forming partnerships and joint ventures is one possible solution. A better idea would be a captive insurer-sponsored initiative to explore these ideas ourselves.
In summary, we close with another quote from Mr. Coles, which is particularly germane to the captive industry.
It's all about the customer. Sometimes what people miss is that what a lot of these start-ups are trying to do is add more value to the customer. They're starting with the customer, and they're going to work backwards to the technology they need to get to. And in some regards, it looks like they are doing things a lot differently than has been done before.
Captive insurers would do well to heed this maxim.
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